2024-09-02_Own_a_Home
00:00:00.500 | When you're in winter's favorite town,
00:00:05.160 | the snow-covered mountains surround you,
00:00:09.800 | a historic Main Street charms you,
00:00:14.520 | and every day brings a new adventure.
00:00:17.120 | Welcome to Park City, Utah, naturally winter's
00:00:23.800 | favorite town.
00:00:26.680 | Join the experience at visitparkcity.com.
00:00:30.240 | Welcome to Radical Personal Finance,
00:00:31.480 | a show dedicated to providing you with the knowledge,
00:00:33.160 | skills, insight, and encouragement you need
00:00:35.320 | to live a rich and meaningful life now,
00:00:37.840 | while building a plan for financial freedom
00:00:39.600 | in 10 years or less.
00:00:40.960 | My name is Joshua Sheets, I'm your host,
00:00:42.520 | and today on the podcast, we continue our series
00:00:44.680 | of financial goals that everyone should set.
00:00:48.840 | This is a series dedicated to shortish,
00:00:52.160 | simple podcasts devoted to one single foundational concept
00:00:57.640 | of a goal that everyone should set.
00:01:00.480 | These are as close to universally applicable goals
00:01:03.540 | as I can come up with.
00:01:04.640 | And the idea behind this series is that
00:01:07.520 | by giving you clear and specific goals,
00:01:10.720 | you are more likely to accomplish a financial abundance
00:01:15.200 | by someone simply telling you here's a goal you should set,
00:01:19.040 | and here's why.
00:01:20.680 | So let's have a quick recap,
00:01:21.880 | 'cause it's been a little while
00:01:22.760 | since we have visited this series.
00:01:24.440 | Goal number one was get a job.
00:01:26.480 | All else being equal, if you wanna make progress financially,
00:01:30.440 | you begin by getting a job.
00:01:32.460 | Goal two is when you get that job,
00:01:35.440 | set a goal to live on half your income.
00:01:38.260 | Spend no more than half your income.
00:01:40.580 | Save half, spend half.
00:01:42.180 | Just from the beginning, 50% of your income.
00:01:45.480 | If you're not able to do that in the immediate here and now,
00:01:48.760 | work towards that.
00:01:50.380 | Goal number three was give away 10% of your income.
00:01:53.040 | We talked a lot about the enormous benefit
00:01:55.660 | of consistently giving money away.
00:01:58.080 | So goal three, give away 10% of your income.
00:02:00.360 | Do it consistently, reliably from the very beginning.
00:02:03.520 | Goal four, begin a job or career that has the potential
00:02:07.200 | to help you to become, in the fullness of time,
00:02:10.600 | a top 20% income earner.
00:02:13.420 | Basically, if you're working at a dead-end job,
00:02:16.000 | then set a goal to start a job
00:02:19.420 | that could lead to your earning top 20% wages
00:02:23.560 | for your context.
00:02:25.160 | You wanna have a growth path in front of you.
00:02:28.200 | So you can switch from your dead-end job
00:02:31.000 | to a job that has a long-term potential.
00:02:33.960 | And that way, over the next decade or the next two decades,
00:02:36.480 | however long it takes you,
00:02:37.860 | you will know that you have the ability to grow
00:02:40.240 | and to become a top 20% earner,
00:02:42.880 | which in the fullness of time,
00:02:44.400 | will solve virtually all of your financial problems.
00:02:47.320 | Goal number five, get as much
00:02:48.720 | of the highest quality education that you possibly can
00:02:52.200 | as soon as you can.
00:02:54.880 | Education, more education, is always a good idea.
00:02:58.920 | And so you should get as much of it,
00:03:01.480 | of the best quality education, as quickly as you can,
00:03:05.620 | as early in your life as you can.
00:03:07.240 | Goal number six, fully fund a Roth IRA.
00:03:09.760 | We talked about the power of a Roth IRA.
00:03:11.880 | That was the first of these discussions
00:03:14.200 | that is US-specific.
00:03:16.120 | So for my international listeners,
00:03:17.640 | you will have some version of that in your area,
00:03:19.600 | and we'll come back to other kinds of retirement accounts
00:03:22.400 | later in the series.
00:03:23.320 | Goal seven, I encourage you to own a dwelling place,
00:03:26.880 | free and clear.
00:03:28.200 | And I use that weird word, dwelling place,
00:03:30.800 | to include a house,
00:03:32.920 | but I specifically talked about the value
00:03:34.680 | of just having some place that is safe.
00:03:37.240 | And that safe place, for some people,
00:03:38.840 | might be a car that you could live in,
00:03:41.720 | or a tent that you could set up.
00:03:44.280 | For some people, it might be a small cabin somewhere.
00:03:46.760 | And for most of us, it will be a house that you own,
00:03:49.920 | a place that you own consistently.
00:03:52.360 | But I wanted to make it clear
00:03:53.560 | that if you don't yet have the ability to own a house,
00:03:57.200 | you should at least have some kind of dwelling place
00:03:59.960 | that you can live in,
00:04:01.720 | or that you could retreat to
00:04:03.280 | if your current rented space doesn't work out for you.
00:04:06.840 | Goal eight, I talked about being debt-free for life.
00:04:09.960 | And I said that if you avoid borrowing money,
00:04:12.880 | everything works better in life.
00:04:15.880 | And so we talked extensively
00:04:16.920 | about becoming debt-free for life.
00:04:18.560 | Today, we're gonna give goal nine,
00:04:21.000 | and probably this is gonna be 9A,
00:04:22.680 | but I'm just gonna characterize it as goal nine,
00:04:25.320 | which is buy a house.
00:04:29.360 | Now, everything I said in goal seven
00:04:31.640 | of dwelling place still applies,
00:04:33.320 | but here specifically today,
00:04:35.320 | I'm going to talk about the value
00:04:37.040 | of your simply buying a house.
00:04:41.280 | And to define my terms,
00:04:43.560 | what I mean is that you are the owner of a residence.
00:04:48.280 | I think that for most people,
00:04:49.480 | the goal should be to buy a house,
00:04:52.320 | a separate single family house of some kind.
00:04:55.280 | That's the type of real estate structure
00:04:58.000 | that has the longest potential
00:05:00.520 | and the best long-term potential
00:05:02.440 | for most people in most areas.
00:05:04.680 | There will certainly be many contexts
00:05:06.520 | in which that's not really doable.
00:05:08.040 | And so if you need, given your context,
00:05:11.200 | to hear the term house as buy a condominium to live in,
00:05:14.720 | buy an apartment that you can live in,
00:05:16.640 | or something else, that's fine.
00:05:18.680 | But I don't want you to just buy a box truck
00:05:22.360 | and live in that.
00:05:23.840 | I think it's nice to have a box truck
00:05:25.640 | that you could live in.
00:05:26.880 | And for somebody who's living in an apartment,
00:05:29.080 | having a box truck stuck away somewhere
00:05:31.960 | that you could live in
00:05:32.880 | is probably a really useful backup plan.
00:05:36.200 | And it could be really fun
00:05:37.360 | in terms of being part of your life.
00:05:39.880 | It could even be a fun thing,
00:05:41.120 | meaning what I mean is you go and travel with it,
00:05:43.680 | and maybe that provides you with a comfortable place
00:05:46.400 | that you can work on the road.
00:05:48.000 | It can be a fun adventure to do something like that
00:05:50.440 | for a couple of years, to live in an RV,
00:05:52.480 | or to live on a boat.
00:05:54.320 | But in the fullness of time,
00:05:56.320 | you're most likely going to want to buy a house.
00:06:00.160 | I've been doing this for a little while,
00:06:01.800 | and one of the things I've noticed
00:06:03.000 | is that for people who make the idea
00:06:06.840 | of just a dwelling place,
00:06:08.360 | and they're open to any idea,
00:06:09.760 | they make that their goal and they stop there,
00:06:12.360 | things change over time.
00:06:14.680 | As much as I myself think it's cool
00:06:16.520 | to live on a narrow boat,
00:06:18.080 | or to live on a sailboat,
00:06:19.800 | or again, live in an RV,
00:06:21.760 | or do some kind of unique alternative lifestyle,
00:06:25.440 | I think that's cool,
00:06:27.360 | but it's not a great long-term plan
00:06:29.880 | for the vast majority of people.
00:06:32.320 | Most people long-term are going to be best provided for
00:06:37.080 | by owning a house,
00:06:40.560 | a traditional house that's connected
00:06:43.280 | to the earth in some way.
00:06:45.280 | So use those other strategies as a great backup plan.
00:06:48.920 | Use it as a great launching plan.
00:06:50.920 | In the previous episode,
00:06:52.040 | I talked about a firefighter
00:06:53.680 | who was living in his back of his pickup truck.
00:06:55.880 | He did that for a couple of years,
00:06:57.360 | saved probably a couple hundred thousand dollars,
00:06:59.800 | then used it to go on and move on to the next step.
00:07:02.920 | So use those things strategically.
00:07:04.920 | But you should have a goal to buy a house.
00:07:08.400 | Whenever I think of universally applicable advice,
00:07:11.080 | I always argue both sides or all sides of the issue.
00:07:14.960 | And so the first thing I think of is simply,
00:07:17.400 | when is it not a good idea to buy a house?
00:07:20.480 | Generally speaking, there are very few scenarios
00:07:24.560 | that I can create, hypothetically,
00:07:28.120 | in which it's not a good idea to buy a house.
00:07:31.880 | If I were going to create such a scenario,
00:07:34.280 | it would include many of the obvious factors
00:07:37.600 | that you intuitively know.
00:07:39.120 | For example, you might be broke.
00:07:41.600 | Well, if you're broke, you probably shouldn't buy a house,
00:07:44.160 | but that's why we've already talked about these other goals
00:07:46.680 | and why I positioned this at goal nine, not at goal one.
00:07:50.320 | So if you're broke, you don't have any money saved,
00:07:52.120 | you don't have a job, you don't have any income,
00:07:54.120 | then this advice is out.
00:07:55.920 | It should be a goal for you to do
00:07:57.480 | after you've accomplished that.
00:07:59.440 | If I were going to create a scenario
00:08:01.280 | in which it were a bad idea to buy a house,
00:08:02.800 | I would have to inject a huge amount of uncertainty
00:08:06.280 | because buying a house for a very short-term period
00:08:09.800 | is usually not a great idea.
00:08:11.880 | So if you know that there's a good chance
00:08:14.520 | that I'm going to move across the country
00:08:16.920 | three months from now to take a new and exciting job,
00:08:19.720 | you wouldn't buy a house.
00:08:21.760 | If you knew there's a good chance
00:08:24.160 | I'm going to get divorced in six months,
00:08:26.120 | you wouldn't buy a house.
00:08:27.800 | If you have any sense of clear impending uncertainty,
00:08:32.160 | then you wouldn't buy a house.
00:08:34.120 | The third set of hypothetical situations
00:08:36.920 | that I could design in which it might be a bad idea
00:08:39.720 | to buy a house are actually the hardest for me,
00:08:43.920 | meaning I have to acknowledge and concede
00:08:46.440 | that these things could be true
00:08:48.160 | while simultaneously saying
00:08:50.240 | they're probably not true for you,
00:08:51.920 | and that is market conditions.
00:08:54.320 | There can clearly be some kind of market condition
00:08:58.720 | where it would be a bad idea to buy a house.
00:09:02.240 | If housing prices are very, very high
00:09:05.080 | and there's some reason why those housing prices
00:09:07.440 | are going to fall catastrophically,
00:09:10.320 | then you would say it's a bad idea to buy a house.
00:09:14.560 | And for my generation,
00:09:15.920 | this is basically the defining characteristic
00:09:18.600 | because many people in my generation
00:09:21.440 | bought their houses for the first time
00:09:23.480 | somewhere around the Great Recession,
00:09:25.600 | the great real estate crash of the 21st century,
00:09:28.920 | at least the first one so far.
00:09:31.120 | And many people went out,
00:09:32.840 | bought houses they couldn't afford,
00:09:34.480 | note the first hypothetical I said,
00:09:36.600 | and wound up losing those houses
00:09:39.280 | because the house has plummeted in value.
00:09:41.960 | Now, interestingly now,
00:09:43.200 | we have enough distance from that event,
00:09:46.840 | from those events, to see that on the whole,
00:09:49.600 | if you could just keep the house,
00:09:50.920 | things would have worked out.
00:09:52.680 | And this is why we come back to it being,
00:09:55.400 | in essence, a universally good idea
00:09:57.840 | for you to buy a house.
00:10:00.440 | If overall you have general stability
00:10:02.960 | in your life and your plans, where you live,
00:10:05.480 | what you're doing, what job you're doing,
00:10:08.080 | and if overall you can afford to buy a house,
00:10:11.360 | you should move forward and simply buy a house.
00:10:15.600 | Statistically speaking,
00:10:17.040 | if it winds up being a financial mistake,
00:10:20.360 | it's most likely going to be a modest financial mistake.
00:10:25.360 | A modest financial mistake would be the kind of thing
00:10:27.720 | where you buy a house, you have all the fees to get it,
00:10:30.680 | you put some money into getting it livable,
00:10:32.360 | and then a year later, you turn around and move.
00:10:35.680 | That might cost you some money,
00:10:37.400 | and you may have been better off renting,
00:10:39.080 | but on the whole, that would have been a modest mistake.
00:10:43.280 | In virtually all other scenarios, though,
00:10:46.080 | you're going to be better off having purchased the house,
00:10:49.120 | lived in the house, and in the long run,
00:10:51.440 | you're going to be really well off
00:10:53.960 | by that one simple decision.
00:10:57.200 | Now, astute, very long-time listeners
00:10:59.600 | of "Radical Personal Finance" should be pointing out
00:11:02.720 | at this very moment that this is different
00:11:05.240 | from the tone and attitude and advice that I gave
00:11:09.240 | in the early history of "Radical Personal Finance."
00:11:12.120 | This is one of those significant things
00:11:13.960 | that I've changed my perspective on in time.
00:11:16.960 | Early in the podcast history,
00:11:18.600 | I recorded podcasts about why purchasing a house
00:11:22.180 | very well might not be a good idea,
00:11:24.680 | and I talked about things like flexibility.
00:11:26.720 | When people own a house, they might be less likely
00:11:30.160 | to be willing to move across country to take a better job.
00:11:33.260 | I talked about the costs of a house.
00:11:35.280 | In some cases, living in a rented house
00:11:37.840 | can be significantly better than a purchased house
00:11:42.280 | because of all of the straight-up costs
00:11:45.200 | of purchasing a house.
00:11:46.120 | I went into the calculations of purchasing a house,
00:11:49.360 | and I showed how, if you factor in the pure costs of a house,
00:11:52.440 | things like insurance and property taxes
00:11:55.080 | and even interest payment on debt,
00:11:57.240 | in many circumstances, those pure costs
00:12:00.840 | are similar to the cost of renting.
00:12:03.440 | And while that analysis wasn't entirely wrong,
00:12:06.720 | what I wound up doing by going down that pathway of advice
00:12:10.520 | was underestimating the long-term value of owning a house,
00:12:14.400 | and that's why I have changed this and corrected this.
00:12:17.440 | One of the books that I really appreciated
00:12:19.920 | that helped me in this process
00:12:22.740 | was a book written by John Reed
00:12:24.840 | called "An American Principal Residence
00:12:27.160 | "Is the Most Advantaged Investment on Earth.
00:12:30.160 | "Maximize Yours."
00:12:31.880 | And I want to share with you a few of Mr. Reed's comments
00:12:34.800 | from this book in the context of purchasing a house
00:12:39.800 | to live in from a financial perspective,
00:12:42.400 | to say nothing of the lifestyle benefits.
00:12:45.360 | Let's begin with a little bit of Mr. Reed's story.
00:12:47.760 | He writes, "When I was a cadet at West Point
00:12:50.240 | "from 1964 to 1968, I changed my mind
00:12:54.100 | "about making a career of the Army.
00:12:56.480 | "I also wanted to get started studying
00:12:58.160 | "whatever civilian career I was going to choose
00:13:00.440 | "while I was still at West Point and in the Army.
00:13:03.840 | "When my senior year at West Point started,
00:13:05.980 | "no civilian career had captured my fancy.
00:13:09.020 | "So I decided I needed to force a choice.
00:13:13.020 | "I knew I wanted to get rich young,
00:13:15.520 | "financially independent, I called it.
00:13:17.500 | "So I researched how to go about that
00:13:19.720 | "in the West Point library."
00:13:21.460 | Admittedly, a far cry from what the Army had in mind
00:13:24.260 | when they decided cadets needed a library.
00:13:27.300 | "One article ended up being my main influence.
00:13:30.900 | "In 1967, I believe, Time Magazine did a cover story
00:13:34.400 | "about young millionaires.
00:13:36.240 | "One was the guy who started Airstream Trailers.
00:13:39.360 | "Another was a Manhattan sandwich shop
00:13:41.260 | "with a line around the block during weekday lunches.
00:13:44.600 | "At the end of the article,
00:13:46.060 | "a summation paragraph said the way to do this
00:13:48.860 | "was to have your own business or to invest in real estate."
00:13:53.660 | Couple of comments here.
00:13:55.720 | I think that this is something that many people,
00:13:58.580 | many young, aggressive young men often do.
00:14:02.080 | As they say, I wanna get rich.
00:14:03.620 | So what's the most direct pathway to getting rich?
00:14:06.780 | This is something that I myself did.
00:14:08.220 | I had many friends who did it.
00:14:09.620 | And as Mr. Reed talks about,
00:14:11.580 | you often wind up in the areas in which information
00:14:15.920 | and inspiration are most easily sold.
00:14:18.920 | You wind up taking a real estate investment seminar,
00:14:22.140 | a stock trading seminar,
00:14:24.180 | an options or futures trading seminar,
00:14:26.420 | or business seminar of some kind.
00:14:28.420 | And this, by the way, I find very frustrating
00:14:30.600 | because while those could be pathways,
00:14:33.620 | I think generally they're pathways for people
00:14:35.460 | who don't have other good options.
00:14:37.440 | And so we really should give more attention
00:14:39.700 | to good career planning
00:14:41.780 | because you can become wealthy in the fullness of time
00:14:44.460 | through almost any career.
00:14:45.940 | And in many cases, much more easily
00:14:47.980 | than pursuing one of these sensationalized careers.
00:14:52.440 | Back to the story.
00:14:53.800 | Army officers cannot have their own business.
00:14:57.600 | Upon graduation from West Point,
00:14:59.280 | you become a second lieutenant in the army.
00:15:01.620 | When I graduated,
00:15:02.500 | you had to be an active duty officer for five years.
00:15:05.440 | So my plan was to study real estate investment
00:15:08.260 | in my spare time as a cadet and as an officer.
00:15:11.620 | Then get out of the army
00:15:12.900 | on the fifth anniversary of my graduation, June 5th, 1973.
00:15:17.900 | I also planned to buy my first real estate investment,
00:15:21.260 | a duplex, which I did on April 15, 1969,
00:15:25.160 | while I was a second lieutenant in the army.
00:15:27.300 | I never lived in it.
00:15:28.500 | It was 16 Harvard Avenue
00:15:30.580 | in the town where my mom lived, Collingswood, New Jersey.
00:15:33.740 | And she received the rent
00:15:35.260 | and occasionally called someone to get something fixed
00:15:37.700 | while I was in Vietnam.
00:15:39.020 | One thing you'll notice from the story, by the way,
00:15:42.140 | is that most things in life favor those who take action.
00:15:46.580 | And in general, people who own real estate, things work out.
00:15:50.940 | And so you'll always see that as a consistent pathway.
00:15:54.180 | The key is to be the kind of person
00:15:56.020 | who goes ahead and takes action.
00:15:57.860 | When I'm counseling somebody
00:15:58.980 | who's thinking about buying a piece of real estate
00:16:00.820 | or buying a rental or not buying,
00:16:02.820 | I usually advise, buy it, try it.
00:16:06.260 | Because in general, it's simple and understandable.
00:16:09.300 | It's hard to mess it up entirely.
00:16:11.740 | And you'll learn a lot from the actual process of doing it,
00:16:15.180 | lessons that can't be gained in any other way.
00:16:18.380 | Fixers, the basic plan I was following was to buy income,
00:16:23.320 | rental properties in need of fix up, fix them,
00:16:26.900 | raise the rents and thereby the property value,
00:16:29.100 | then trade up to another more expensive income property
00:16:31.680 | and repeat.
00:16:32.980 | An income property is an apartment building
00:16:34.940 | or a smaller rental property like a duplex or triplex.
00:16:38.560 | William Nickerson wrote several books on that.
00:16:40.900 | And I was following his formula.
00:16:42.840 | If you're interested in that,
00:16:43.880 | I recommend my own book, "Fixers" to you.
00:16:46.180 | Nice, but I wanted to be big time.
00:16:49.940 | Just owning a duplex made me feel special,
00:16:52.220 | but I was anxious to move up to apartment buildings.
00:16:54.980 | Then I would be commercial, a big shot,
00:16:59.380 | a mogul, not a mere duplex owner.
00:17:02.020 | Joe Schmo owns a duplex.
00:17:04.260 | I wanted to be big time.
00:17:07.140 | This book is about only owning a principal residence
00:17:10.700 | throughout your whole life.
00:17:12.780 | It is a manifestation of my concluding from hard experience
00:17:16.640 | that the only property I needed to buy
00:17:19.500 | or should have bought was a series of principal residences.
00:17:23.700 | I did buy and live in a series of homes.
00:17:26.900 | 1972, a home in New Jersey.
00:17:28.980 | 1973, another home in New Jersey.
00:17:31.140 | I'm going to skip all the addresses.
00:17:32.400 | 1974, a home in New Jersey.
00:17:34.580 | 1980, a house in California.
00:17:36.740 | 1983, a home in California.
00:17:39.260 | My wife and I designed Bryan Drive,
00:17:41.620 | the final house that he purchased,
00:17:43.260 | and had it built as a brand new home,
00:17:45.420 | raised our three sons there, and we still live in it.
00:17:48.460 | But I also owned a duplex in Collingswood, New Jersey,
00:17:52.300 | another in Haddon Heights, New Jersey,
00:17:54.300 | a 12-unit apartment building in Mount Holly, New Jersey,
00:17:56.780 | a 37-unit apartment building,
00:17:58.580 | the Greenbrier in Corsicana, Texas,
00:18:01.140 | the 25-unit Cottonwoods Apartments in DeSoto, Texas,
00:18:03.980 | the 33-unit Las Brisas apartment in Fort Worth, Texas.
00:18:08.700 | So we can see from Reed's accounting
00:18:11.180 | of his history of property ownership that he did it.
00:18:14.220 | He accomplished the dream
00:18:15.520 | of owning dozens and dozens of doors.
00:18:18.180 | He hit the big time.
00:18:20.020 | Tenants and employees are too often a pain in the neck.
00:18:23.620 | We got sued.
00:18:24.660 | We had to fire bad employees
00:18:26.080 | and try to replace them with good ones.
00:18:27.960 | The main problem was the savings and loan debacle
00:18:30.160 | in Texas in the 1980s.
00:18:32.060 | To make a long story short,
00:18:33.380 | we lost $750,000 in apartment buildings in Texas.
00:18:37.980 | And I checked and learned that if,
00:18:41.660 | instead of the apartment buildings I owned there,
00:18:44.420 | I had owned single-family homes across the street
00:18:46.700 | from my apartment buildings,
00:18:48.320 | I would have lost little or no money.
00:18:51.260 | That is when I decided my wanting to be a big shot,
00:18:54.700 | mogul, commercial, apartment building-owning guy
00:18:58.100 | was the biggest financial mistake of my life.
00:19:01.900 | Classmate and I bought at the same time,
00:19:05.000 | but different results.
00:19:06.660 | More recently, a college classmate and I
00:19:08.940 | each bought separate, unrelated homes
00:19:10.900 | in the San Francisco area for about the same price
00:19:13.840 | in the same month in 1983.
00:19:16.260 | My wife and I bought Bryan Drive,
00:19:18.060 | the brand new house I described above in Alamo,
00:19:20.780 | a suburb of San Francisco.
00:19:22.860 | My classmate and his wife bought an old house
00:19:24.920 | in one of San Francisco's more prestigious neighborhoods,
00:19:27.600 | St. Francis Wood.
00:19:29.300 | Another long story short,
00:19:30.780 | when they sold theirs for over 4 million in the mid-20 teens,
00:19:34.900 | ours was worth about $1.8 million.
00:19:37.860 | Why the difference?
00:19:39.060 | Partly, they did more fix-up on their old house
00:19:41.220 | than we did on our new one.
00:19:42.940 | Mainly, the Silicon Valley economic boom
00:19:45.060 | affected the city of San Francisco
00:19:46.660 | more than our East Bay suburb.
00:19:49.300 | I was happy for them.
00:19:50.660 | I preferred our new house in the nice weather,
00:19:52.860 | uncongested East Bay hills
00:19:54.580 | to the cold, blustery old neighborhood they lived in.
00:19:57.660 | They sort of felt the same way,
00:19:58.840 | and that was why they sold it.
00:20:00.460 | They relocated to La Jolla,
00:20:02.220 | a gorgeous oceanfront neighborhood in San Diego.
00:20:05.120 | But think about the numbers.
00:20:08.980 | They made more on that one house
00:20:12.480 | than I made and lost on my apartment buildings.
00:20:17.420 | Hell, so did I with my less spectacular gain
00:20:20.540 | in one suburban house.
00:20:23.980 | Plus, I had no tenants and no employees
00:20:27.060 | and no lawsuits with my principal residents.
00:20:30.900 | Now, pay careful attention to this next section.
00:20:34.660 | I should have only bought principal residences.
00:20:38.740 | The light bulb went on.
00:20:40.820 | I should have bought nothing but single-family,
00:20:44.900 | owner-occupied principal residences.
00:20:48.460 | My principal residences cost $32,000, $30,000,
00:20:53.460 | $36,000, $122,000, and $356,000, if I recall correctly.
00:21:00.860 | But during that time, I also bought 68 rental units.
00:21:05.740 | If I had put all those down payments
00:21:08.100 | and negative cash flow into my personal residences,
00:21:11.900 | I could have bought something like double
00:21:14.060 | or triple on the last three houses,
00:21:16.700 | call it 2 1/2 times bigger.
00:21:19.020 | That would have been $90,000, $305,000,
00:21:23.660 | and the $890,000 purchase in 1983 in Greater Silicon Valley
00:21:29.660 | would today be worth something like $10 million.
00:21:33.660 | Suppose I had pursued that strategy my whole adult life
00:21:37.100 | knowing what I know now.
00:21:38.940 | I can't do that now because I am 74 years old.
00:21:42.660 | But with my help in the form of this book, you can.
00:21:45.580 | And maybe my three sons can, too.
00:21:48.500 | Also, the list of advantages of an owner-occupied
00:21:51.700 | single-family principal residence is extremely long
00:21:55.180 | and beats not only apartment buildings,
00:21:57.380 | but also stocks, bonds, commodities,
00:22:00.860 | and almost all other investments.
00:22:03.860 | The only reason to invest in other types of assets
00:22:07.260 | is to diversify against the risks of principal residences.
00:22:11.100 | They do have some risks, and there
00:22:12.980 | is a chapter about those risks in this book.
00:22:15.940 | Now, I'll give you the list of advantages in just a minute,
00:22:18.420 | but I want you to pay attention to that.
00:22:20.580 | Reed made his business first by investing in real estate
00:22:25.980 | after he got out of the army.
00:22:27.540 | Then he became a real estate guru,
00:22:29.540 | publishing books on real estate and maintaining
00:22:32.380 | an active real estate newsletter.
00:22:34.820 | And here at the end of his career, at 70 years old,
00:22:38.140 | he discovers that all he had to do was buy a house
00:22:42.160 | and live in it, and then systematically upgrade
00:22:44.820 | that house over time.
00:22:46.380 | And that's basically the essence of his book.
00:22:49.500 | When I read that book, combined with other influences,
00:22:52.140 | I realized I cannot short circuit these benefits.
00:22:57.220 | And that's when I became a much more consistent advisor
00:23:01.900 | to say you should purchase a house and live in it.
00:23:06.580 | Now, one more paragraph here, and then the list of benefits.
00:23:11.000 | Main asset for most older Americans.
00:23:14.140 | For most Americans in their 60s, their net worth
00:23:16.500 | is composed mainly of their principal residence, equity.
00:23:20.420 | A website called newretirement.com
00:23:22.220 | says in 2020, the average American 65 to 74 years old
00:23:26.740 | had $51,948 in savings and $153,300 in home equity,
00:23:34.100 | amounting to 72% of their net worth.
00:23:37.460 | Only about 36% of retirees have an IRA.
00:23:41.380 | Those have an average balance of $123,973,
00:23:46.340 | although those held over 20 years
00:23:48.060 | have an average balance of $283,200.
00:23:51.740 | The average 401(k) for people in their 60s has $182,100.
00:23:57.220 | Why is home equity the largest asset most seniors have?
00:24:02.720 | Three main reasons.
00:24:03.900 | One, mortgage amortization is forced savings.
00:24:08.420 | Two, appreciation.
00:24:10.780 | Three, leverage.
00:24:13.100 | Each time you make a mortgage payment
00:24:14.700 | on a 30-year fixed-rate self-amortizing mortgage,
00:24:17.380 | you pay down the balance of the mortgage loan.
00:24:20.340 | That is like savings, but no one makes
00:24:22.740 | you put money into savings.
00:24:24.660 | Your mortgage lender most certainly
00:24:26.140 | does make you pay the mortgage payment.
00:24:28.900 | That's good for you, like exercise and watching
00:24:31.260 | your weight, although you should also keep your home equity
00:24:34.020 | percentage of the current value of the home as low as is still
00:24:36.660 | safe at all times because appreciation is generally
00:24:39.500 | far larger than amortization.
00:24:41.380 | By the way, you can set up automatic deposits
00:24:44.140 | into your savings account by various means, and you should.
00:24:48.060 | So the key fact that we need to wrestle with
00:24:49.900 | is if you look at the actual finances of Americans
00:24:54.060 | in the back part of their life, you
00:24:56.260 | find that their home equity is generally
00:24:58.860 | the single most valuable asset for them.
00:25:02.300 | Now, when I was younger, I found this very hard to believe
00:25:04.860 | because I was obsessed with stocks and retirement accounts
00:25:07.660 | and all the many benefits of that.
00:25:09.620 | I dramatically underappreciated the value
00:25:13.140 | of a forced savings system, of making mortgage payments,
00:25:17.300 | and of stability, of just living in a place
00:25:19.900 | and letting assets grow.
00:25:20.940 | I was intoxicated with the idea of high returns.
00:25:24.940 | Today, with a few more years under my belt,
00:25:27.780 | a few hundred more financial consultations,
00:25:30.580 | and I realize the enormous importance of owning a house
00:25:36.500 | that you live in, and I believe that it's entirely
00:25:39.900 | appropriate for you to count that house as part
00:25:43.460 | of your financial savings.
00:25:48.140 | Now, Reed continues and talks about why home equity is
00:25:50.500 | the biggest asset for most seniors
00:25:52.100 | and talks about all kinds of the benefits,
00:25:54.860 | and he lays out the basic strategy
00:25:56.500 | that he wants you to focus on.
00:25:57.940 | This book urges you to maximize your principal residence value
00:26:01.220 | and to minimize your equity percentage safely
00:26:03.580 | throughout your adult life.
00:26:05.300 | But there are three ways to do that,
00:26:07.540 | and I only want you to use the first.
00:26:10.500 | The three ways are one, location; two, size; three,
00:26:15.500 | finish and amenities.
00:26:17.780 | Some of the houses that cost a million dollars
00:26:19.700 | cost that much because they're in a great location,
00:26:22.380 | even though they have a normal size lot, say a third of an acre
00:26:25.580 | and normal finish.
00:26:27.220 | I want you to stick to normal size houses,
00:26:30.140 | 1,500 to 3,500 square feet, and normal size lots,
00:26:33.980 | fifth of an acre to one acre.
00:26:35.980 | Finish refers to extravagant fixtures like gold faucets
00:26:39.340 | or extravagant amenities like an indoor basketball court
00:26:42.020 | or pool or multiple kitchens or a restaurant-type kitchen.
00:26:45.860 | In other words, I want you to buy more and more expensive
00:26:48.420 | houses, but I want that increased value
00:26:50.500 | to be in the location, not the size of the building
00:26:54.060 | or the lot, and not in terms of lavish, extravagant fixtures
00:26:58.380 | or amenities.
00:27:00.140 | For example, in my area, San Francisco,
00:27:02.460 | your final $10 million or so house
00:27:04.500 | would probably be in Palo Alto, where many Silicon Valley
00:27:08.020 | billionaires live, or a view property on San Francisco
00:27:10.940 | Bay, like in Tiburon or Belvedere.
00:27:13.620 | And it would be a 2,500 or 3,000-square-foot house
00:27:16.700 | on a half-an-acre lot.
00:27:18.260 | It goes on, talks about the benefits of a house.
00:27:20.380 | You can live in it, store things in it, work in it.
00:27:23.780 | You don't have to sell it to use it.
00:27:25.860 | Gives all kinds of ideas on active profit strategies.
00:27:29.260 | And then the rest of the book--
00:27:30.740 | that's just from the initial chapter of overview--
00:27:33.060 | the rest of the book is dedicated towards all kinds
00:27:35.420 | of detail and advice on how to do it.
00:27:39.060 | The benefits of homes over other assets, leverage, use value,
00:27:42.620 | active profit strategy, price variations, life phases,
00:27:45.700 | transaction costs, risks, working at home, school
00:27:48.300 | district, climate, property taxes, energy, insurance,
00:27:50.500 | telecommunications, parking, living off your land,
00:27:52.580 | durability, pool, and a conclusion.
00:27:54.620 | It's a good book, as are most of his books.
00:27:57.660 | But the basic lesson is buy a house
00:28:00.820 | and factor that into your overall planning portfolio.
00:28:05.100 | Younger Joshua, in the early days
00:28:07.660 | of radical personal finance, said to himself and also
00:28:11.220 | in public that we should exclude the value
00:28:14.020 | of personal consumption assets from our financial planning
00:28:17.820 | framework.
00:28:18.540 | So if I have a house that I'm living in,
00:28:20.660 | I should think of that as just simply a consumption asset,
00:28:23.260 | not as an investment asset.
00:28:25.060 | This is basically an extrapolation
00:28:26.620 | of the classic Robert Kiyosaki idea of assets
00:28:30.540 | and what they actually-- and liabilities.
00:28:34.300 | And while there's usefulness in thinking that way sometimes,
00:28:38.460 | it understates how valuable buying a house
00:28:41.620 | is in the long term.
00:28:43.700 | So to make it simple, I think you
00:28:46.260 | should set a goal of owning a home, buying a home.
00:28:50.740 | And if you don't have all the money that you need for it,
00:28:53.380 | then I think you should be perfectly
00:28:55.340 | fine with taking out a mortgage and financing the property.
00:28:59.140 | And you should have a goal of owning a home.
00:29:01.580 | This decision should be the default choice for all people
00:29:06.060 | who have an income and who have a little bit of money saved
00:29:09.060 | and who are at least somewhat consistent in their lifestyle
00:29:13.260 | and have at least basic expectations of what
00:29:16.700 | the next few years could be.
00:29:17.980 | So let's walk through a life cycle,
00:29:19.880 | and let's talk about the applications of this.
00:29:22.620 | If you are young and you start working when you're young
00:29:25.740 | and you start saving money when you're young,
00:29:27.860 | and let's assume that you become an adult
00:29:29.940 | and you're thinking about going to college,
00:29:32.580 | I think that you should consider very seriously owning a home.
00:29:37.060 | Some colleges may have rules about your living
00:29:39.180 | on campus the first year.
00:29:40.380 | That's fine.
00:29:40.900 | Go live on campus the first year.
00:29:42.580 | But after the first year, buy a home near the campus.
00:29:45.860 | And then go ahead and get a couple of roommates.
00:29:47.940 | Live off campus, own the home, have your roommates pay you
00:29:51.180 | a rental payment, and enjoy the benefits of having an asset
00:29:55.060 | that you now own instead of purely renting or paying money
00:29:59.060 | to the school for the school's real estate.
00:30:01.340 | That's a good strategy.
00:30:02.620 | Now, when you finish college, you can sell it
00:30:05.420 | or you can keep it.
00:30:06.700 | That's always the choice that you have when you're
00:30:08.940 | ready to move out of a house.
00:30:10.820 | And while you can go both ways, you
00:30:13.260 | don't have to generally choose in the short term.
00:30:15.740 | So you finished up college, great.
00:30:17.500 | Keep the apartment.
00:30:18.340 | Keep the house.
00:30:19.180 | Keep it rented out to college students.
00:30:21.140 | Have a management company or do it yourself from afar.
00:30:24.180 | It's not that hard to do.
00:30:25.820 | Let's say that you're moving around getting a job.
00:30:27.900 | No problem.
00:30:28.820 | If you move to a new city, stay in a long-term Airbnb
00:30:31.940 | for three months or six months.
00:30:33.700 | That's fine.
00:30:34.740 | But in the meantime, if you're looking around
00:30:37.020 | and you have a job and you think,
00:30:38.500 | I could be here for at least a few years,
00:30:40.500 | go ahead, purchase a home.
00:30:42.020 | That's actually a great time to go ahead and list
00:30:44.100 | the first house that you bought when
00:30:45.640 | you were in college for sale.
00:30:47.300 | After all, you're living in an Airbnb.
00:30:49.260 | So you can just simply take that time
00:30:52.280 | to go through the selling process
00:30:54.140 | and then go ahead and purchase your second house
00:30:56.700 | while you're still deciding, is this job going to work out
00:30:59.140 | going through the probationary period.
00:31:00.980 | If you know that you're only going to be somewhere for a year
00:31:04.380 | or 18 months or two years and you're
00:31:07.020 | sure that you're only going to be there for a short time,
00:31:09.440 | then that's a good reason to rent.
00:31:11.580 | Better to just rent inexpensively
00:31:13.640 | or, if necessary, pursue some kind of alternative housing.
00:31:17.780 | But if you're going to a place and you're
00:31:20.740 | not sure if it's going to be two years or four years,
00:31:23.420 | go ahead and buy a house.
00:31:25.780 | It'll probably work out.
00:31:27.380 | And if it doesn't, you probably won't lose much.
00:31:30.540 | Going on through life, be willing to just simply repeat
00:31:34.100 | that process.
00:31:35.100 | And each time you sell a house, trade up.
00:31:38.380 | Trade up to a house that is in a better location.
00:31:41.340 | And make sure that you generally always own a home.
00:31:44.960 | If you are renting, it should be a strategic decision
00:31:48.500 | for a specific reason.
00:31:51.180 | I'm only here for one year for a contract.
00:31:53.980 | I'm specifically looking for a house,
00:31:55.600 | but I've just moved to a new area,
00:31:57.020 | and I don't know where specifically I want to live yet.
00:32:01.020 | It should be a strategic move to rent
00:32:04.020 | rather than the default option.
00:32:06.700 | The default mindset that you should instill and install
00:32:09.740 | into yourself, into your children,
00:32:12.340 | and into anyone around you that you want to win with money
00:32:15.620 | is that all people should have a goal
00:32:18.300 | to purchase and own a home.
00:32:21.420 | Do that process consistently over a lifetime,
00:32:26.120 | and there's a pretty decent chance
00:32:28.740 | that you will have millions and millions of dollars
00:32:32.040 | of real estate equity that will perform
00:32:34.140 | a very valuable function for your financial planning
00:32:38.500 | in the fullness of time.
00:32:40.180 | There's much more that could be said.
00:32:42.560 | Comments about the tax deductions,
00:32:45.660 | the leveraging ability, the security, the asset protection.
00:32:49.940 | I could make this podcast four hours.
00:32:51.820 | I'm choosing to make it 30 minutes
00:32:53.700 | in hopes that it will reach more people
00:32:55.700 | and allow you to interact with those you love around you.
00:32:58.460 | So in conclusion, goal number nine,
00:33:00.300 | goal that everyone should set,
00:33:03.560 | own a house, a home for yourself and your family.